The problem of inadequate retirement income has become a major national issue. Submissions on reforms to our pension system here have been received by the National Pensions Policy Initiative and the next step is for the State to come up with a radical and realistic approach to pension funding for the next millennium. Mr S, 65, who lives in Galway and retired this year cannot wait that long: "I've lived a varied life and find myself short 10 years for a full pension. I expect only a small lump sum, though with savings I expect a total lump sum of about £50,000 and a gross pension of £11,000 per annum. My problem is how best to invest the £50,000 to supplement my income?"
Mr S is unmarried, has no dependants, does not have a mortgage or any other pressing debts. If he is very risk averse, he could go the cautious route and put his money in a low DIRT Special Savings Account (yield of about 6 per cent to 6.5 per cent) or other guaranteed deposits, and maybe put a small amount in a short-term tracker for a bit of capital growth. But he is specifically seeking to boost his low income and given that he has no dependants (and consequently no need to ensure their future income requirements) we asked independent financial adviser Owen Morton of Moneywise for his suggestions.
"I would tend to favour a with profit bond that is fairly secure for someone in these circumstances," explains Mr Morton, "mainly because it poses little risk to capital and pays out a good after-tax income, or combination of income and growth.
"Scottish Provident's With Profit Bond is currently paying an after-tax return of between 7 and 8 per cent. If Mr S was prepared to draw down just 6 per cent taxpaid then he would also have the prospect of a bit of growth on his capital." The Scottish Provident with profit bond, as well as Equitable Life's equivalent, has produced excellent fund performance in recent years and both companies are strong mutuals - i.e. no shareholders to reward each year. "There is always a risk that bonuses may not be maintained, but there is a basic guarantee of 2.5 per cent per annum with the Scottish Provident bond and add-on bonuses that once paid, are also guaranteed not be taken away."
At today's rates, Mr S could expect between £3,000 and £4,000 per annum from the Scottish Provident bond. His capital would be relatively secure as the product is designed to last for an investment period of at least five and up to 10 years. Set up charges mean that capital appreciation is restricted in the first years, with better returns available from deposits. Drawing down an income in those first few years will also impact on the capital, though over the 10-year life of this bond, the capital is relatively safe and has potential for slight growth if income is restricted, say to 6 per cent. Still, Mr S should be aware that a serious downturn in investment markets will have an effect on any with-profit income/capital growth.
Before making any choice, Mr S should seek out professional advice and make sure that any recommended product, its initial and on-going charges and capital guarantees are fully explained. Scottish Provident bonds are sold only by brokers and fee-based advisers who are paid a commission (the fee-based ones will waive or refund the commission); Equitable Life does not pay commission to outside intermediaries so their bonds are sold either by the direct sales force or by fee-based intermediaries.
